If there were any doubts about the success of Wal-Mart's (WMT 0.51%) turnaround efforts, the retail giant just laid them to rest.
At its investor day conference on Tuesday, the company issued its annual guidance for the coming year and called for 5% growth in adjusted earnings per share in fiscal 2019, which would be its first year of earnings growth in four years.
The stock surged more than 5% on the news and touched a two-year high. Since Wal-Mart first outlined its turnaround strategy two years ago, which included raising base wages to $10 an hour, it has now gained more than 50%, further evidence that the turnaround plan is having the desired impact.
In addition to its fiscal 2019 earnings guidance, here were the other highlights from the announcement:
- The company reiterated fiscal 2018 adjusted EPS guidance of $4.30-$4.40.
- Management said it planned to repurchase $20 billion in stock over the next two years.
- Revenue is expected to grow at least 3% next year.
- U.S. e-commerce growth will grow about 40% next year.
Beyond the headline numbers, some key themes about the company's future are continuing to take shape.
Leverage physical, invest in digital
The biggest shift in Wal-Mart's strategy in recent years has been its decision to essentially stop opening new stores in the U.S. For decades, the company built new and bigger stores across the country as a way of driving sales ever higher, but in the e-commerce era, that tactic has lost its edge. In fiscal 2015, it opened 119 Supercenters, 235 Neighborhood Markets, and 21 Sam's Clubs in the U.S. Next year, Wal-Mart plans to open fewer than 15 Supercenters and fewer than 10 Neighborhood Markets.
However, the company is spending just as much on capital expenditures with a budget of $11 billion next year, the same as this year. Instead of opening new stores, the retailer is using that money to improve current stores by "prioritizing store remodels and digital experiences." Those include adding another 1,000 online grocery pickup locations and improving its e-commerce supply chain.
Thus far, Wal-Mart's most successful e-commerce efforts have been in hybrid initiatives like online grocery pickup, which show how it's leveraging its physical stores. Programs like pickup discount, pickup towers, and the newly announced 30-second, app-based returns are further examples of that strategy. With a store within 10 miles of 90% of the U.S. population, Wal-Mart clearly sees its existing store network as a key source of competitive advantage.
Over the coming years, investors should Wal-Mart to continue to make the kind of investments and acquisitions it's done since it doled out $3.3 billion to take over Jet.com. It recently acquired New York-based package delivery service Parcel for less than $10 million in order to facilitate free same-day delivery in the New York area. Such a move would be groundbreaking for the company, especially if it spreads to other cities, as it would effectively leapfrog Amazon (AMZN) Prime's promise of free two-day shipping.
Elsewhere, Jet will continue to integrate recent acquisitions like Bonobos and ModCloth, and I wouldn't be surprised to see the company take over more fashion brands. However, Wal-Mart's biggest focus will continue to be on using its stores to drive e-commerce sales and make online shopping easier with initiatives like allowing returns through its app.
Despite the improvements, Wal-Mart stock may be reaching an exhaustion point in its two-year bull run. Shares now trade at a P/E of 20, higher than at any point over the last 10 years. Meanwhile, earnings-per-share growth next year will be largely driven by share buybacks rather than a meaningful increase in profits.
It's a reminder that even as Wal-Mart is reasserting itself, the company is up against stiff competition as dynamics in the retail industry continue to shift. With profits set for only modest growth next year, share appreciation is likely to be slower from here.